Gehl v. Commissioner

50 F.3d 12 (8th Cir. 1995)

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Nature of the Case

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Facts

Ps borrowed money from the Production Credit Association of the Midlands (PCA). Mortgages on a 218-acre family farm were given to the PCA to secure the recourse loan. Ps were insolvent and unable to make the payments on the loan, which had an outstanding balance of $152,260. Pursuant to a restructuring agreement, Ps, by deed in lieu of foreclosure, conveyed 60 acres of the farmland to the PCA on December 30, 1988, in partial satisfaction of the debt. Ps basis in the 60 acres was $14,384, and they were credited with $39,000 towards their loan, the fair market value of the land. On January 4, 1989, Ps conveyed, also by deed in lieu of foreclosure, an additional 141 acres of the mortgaged farmland to the PCA in partial satisfaction of the debt. Ps basis in the 141 acres was $32,000, and the land had a fair market value of $77,725. Ps also paid $6,123 in cash to the PCA to be applied to their loan. PCA then forgave the remaining balance of the taxpayers' loan, $29,412. Ps were insolvent both before and after the transfers and discharge of indebtedness. D determined tax deficiencies of $6,887 for 1988 and $13,643 for 1989 on the theory that the taxpayers had realized a gain on the disposition of their farmland in the amount by which the fair market value of the land exceeded their basis in the same at the time of the transfer (gains of $24,616 on the 60-acre conveyance and $45,645 on the conveyance of the 141-acre conveyance). Ps petitioned the Tax Court. The Tax Court found in favor of D. The court 'bifurcated' its analysis considering the transfers of land and the discharge of the remaining debt separately. Ps argued that the entire set of transactions should be considered together and treated as income from the discharge of indebtedness; any income derived would be excluded as Ps remained insolvent throughout the process. The court found Ps to have received a gain includable as gross income from the transfers of the farmland despite the continued insolvency in that the gain from the sale or disposition of land is not income from the discharge of indebtedness. Ps appealed.